Nike Inc (NKE)

As you’re no doubt aware Nike Inc is the largest supplier of athletic shoes, sporting equipment, and sporting apparel in the world. Its brand name has been valued in excess of $32 billion, giving it the title of the worlds most famous sports brand. They employ approximately 76,000 directly and another whopping 1.1 million indirectly through outsourced factories in more than 40 countries.

The company was founded in Oregon in the mid-1960s by the athlete and coach combination of Phil Knight and the legendary Bill Bowerman. Initially, they began importing running shoes from Japan and selling them at race meets from the boot of their car. However, disappointed with the increasing costs and declining quality of products they were receiving, set about designing and manufacturing their own style of running shoe which Bowerman put together using an old waffle iron.

The imprint from the iron on the bottom of the shoe helped it grip to the new urethane tracks that had spread out across the US. For the top of the shoe, and to make it as light and as durable as possible, Bowerman tested everything from carp skin, rattlesnake skin, to kangaroo skin. Nike’s waffle trainer hit stores in 1974 and was adopted by both professional runners and pavement pounders alike and the Nike brand was born. The waffle iron now sits in pride of place at Nike’s world headquarters near Beaverton in Oregon.

The original Nike Waffle Shoe

These days, of course, Nike makes much more than just running shoes. As well as making their own Nike brand basketball shoes, they also own the famous Converse brand and have shoe lines for football, basketball, tennis, soccer, baseball, cricket amongst many others. Name a sport and Nike make a shoe for it. When it comes to sporting equipment Nike specialise in high-end gear for everything from golf to surfing to skateboarding. Its clothing apparel line covers everything from sportswear to training gear to casual streetwear.

Like with most companies, the outbreak of the global pandemic brought a swift halt to revenue growth, which had grown year on year since 2011. In the March quarter, Nike revenue fell by 38%. At its peak, in February around 75% of Nike stores in China were closed, and by late March they had closed all of their stores in the US, Canada, Western Europe, Australia and New Zealand.

Nike produces approximately 25% of its sporting apparel in China, as well as one in every three of its sports shoes, while employing more than 210,000 workers. When China shuts down its a big problem for Nike, and the coronavirus came out of the blue. However, even before the shutdowns, Nike had been in the process of moving a lot of its manufacturing into a more diverse group of countries. A strategy that will only increase going forward.

Since the first quarter of 2020 Nike has done nothing but kick goals. Earnings were up by 10% in the latest quarter with revenue only 1% down on what they achieved in 2019. Importantly, it has been an increase in its e-commerce segment that has taken up a lot of the slack.

Even before the shutdowns hit Nike was focussing on growing its online presence. Its aim was to grow digital sales by 30% by 2023, however, in the last quarter, with consumers stuck in their homes, digital sales increased by an impressive 82%. In the quarter previous to that they were up by 74%. Like with most companies the pandemic has only accelerated the pace at which customers take up purchasing from digital channels. Nike is now expecting to see digital sales account for half of all revenue in just the next few years.

To help with this Nike has been particularly interested in growing customer engagement through its online apps. Customers can use apps such as the Jordan Breakfast Club (named after basketball legend Michael Jordan) to receive daily reminders and personal workout regimes from leading athletes around the world. SNKR gives users access to limited releases and special products and lets consumers buy products by using augmented reality to measure shoe size. During the pandemic, the Nike Training Club app, which provides workouts, nutrition advice, and expert advice, increased usage by more than 100% in the US, and by 80% in Greater China.

It’s so confident in its own digital sales channels that last November Nike stopped selling its products through the number one e-commerce market in the world Amazon (AMZN). Unhappy with how Amazon had failed to eliminate the sale of fake Nike products on its platforms, they decided to go it alone and create a more” direct and personal relationship” with its customers. The move under new CEO John Donahoe has paid massive dividends. Donahoe was previously head of ServiceNow (NOW), and before that PayPal (PYPL) and eBay (EBAY). Three of Capital 19’s favourite companies over the last decade. Nikes future is certainly in good hands.

So how is the share price looking and is it a buy? Well, after a rocky start to the year as the share price fell more than 30% during the March swoon the stock has done nothing but climb higher. It is 85% above its March lows and up 27% year to date, currently sitting around the $130 mark. I love the company and I love the growth prospects but I see it as a little too expensive at these prices. I would like it to be around the $110-$115 mark before I looked at picking some up. A small pullback in the near future would make Nike a great buy, and a stock to be held well into the future.